The Monetary Board decided today to reduce by 25 basis points the Bangko Sentral’s overnight borrowing and lending rates to 7.5 percent and 9.75 percent, respectively, effective Friday, 18 January 2002. At 7.5 percent, the BSP’s overnight RRP rate is the lowest since 1 September 1995. This brings the cumulative reduction in the BSP’s policy rates to 750 basis points since December 2000. This decision marks the first action of the Monetary Board under the inflation targeting framework.
Expectations of a tame inflation outlook consistent with the inflation target for the year have provided the BSP with leeway to further ease monetary policy. The Monetary Board also considered the decline in foreign interest rates in its decision to cut the policy rates. The reduction in interest rates is expected to help stimulate domestic demand, which should counter the slack posed by still weak global economic conditions.
The Monetary Board also approved another two (2)-percentage point reduction in the liquidity reserve requirement on deposits and deposit substitute liabilities, common trust funds (CTFS) and trust and other fiduciary liabilities (TOFA) of commercial banks and non-banks with quasi-banking functions (NBQBs), also effective 18 January 2001. This move effectively restores the liquidity reserves to the pre-July 2001 level at 7.0 percent. This measure is expected to free up liquidity of about P26.0 billion over time as banks eventually transform the “free liquidity” into loans for productive activities. Greater liquidity could lead to a further downtrend in market interest rates, which could help enhance the repayment capability of firms and provide a boost to the fiscal position. Altogether, these factors could raise market sentiment, and spur economic growth.
The Monetary Board also approved a change in the structure in the tiering scheme on the BSP’s overnight RRP window as follows: 7.5 percent for placements of up to P5 billion, 4.5 percent for the next P5 billion, and 1.5 percent for placements in excess of P10 billion. This measure is expected to induce banks to shift the additional liquidity due to the easing of the monetary policy settings into lending for productive activities.
Going forward, the Bangko Sentral will continue to closely monitor factors that could affect the inflation outlook to ensure that price stability consistent with the economy’s growth objective is achieved.
The Monetary Board is scheduled to deliberate on the appropriate stance of monetary policy on 12 February 2002, four weeks from now. However, this does not preclude the Monetary Board from meeting before this date if the situation calls for it.